Market Matters Report / Market Matters Weekend Report Sunday 17th November 2019

By Market Matters 17 November 19

Market Matters Weekend Report Sunday 17th November 2019

Market Matters Weekend Report Sunday 17th November 2019

The ASX200 experienced another choppy week courtesy of an about turn in bond yields but following a strong session on Friday the index finally closed up over +1% . The local market’s now only 1.2% below July’s all-time high, a solid result especially considering 3 of the “Big 4” banks recently traded ex-dividend. Following a poor Australian employment report, suggesting Australia may be closer to a recession than many believed, it was the stocks / sectors who revel in a low interest rate environment who enjoyed the week most i.e. IT , Healthcare and Real Estate  stocks. Todays report has focused on how we see bond yields moving into Christmas because this will dictate how MM wants to structure portfolios both short & medium-term.

Overall investors remain cautious and fund managers are largely “cashed up”, we’re definitely not seeing any irrational exuberance in the air, a fact which was illustrated perfectly by WeWork’s failed IPO. However we are seeing huge P/E expansion by the perceived safe / quality stocks i.e. P/E expansion is simply investors being prepared to pay more for the same stock without any fundamental changes, or in other words making them expensive. Overall we don’t believe this is a classic backdrop for the major market top which so many are predicting but it does make us believe stock selection is becoming increasingly more important.

Warren Buffett summed up the current fascinating investment landscape perfectly back in May, when US 30-year bonds were yielding well over 2.5%. The same bonds have now fallen to 2.3% after actually dipping under 2% in August / September. Hence one would assume the “Oracle of Omaha” would not be surprised if global equities kept rallying, especially if we see yields fall further:

“Stocks are ridiculously cheap if interest rates stay at current levels “ - Warren Buffett.

Our underlying view towards the ASX200 remains intact: MM is technically neutral to bullish while our “Gut Feel” is we’ll see fresh all-time highs before Christmas.

Last week’s rotation away from value stocks (Banks  & Resources) back towards growth / interest rate sensitive plays was no great surprise but it can have a huge impact on a portfolios performance in a very short space of time, especially on a relative basis – last week the differential between the IT and  Resources sector was over 6%! Hence not surprisingly we are very keen to keep our finger on this important pulse.

ASX200 Index Chart

The chart below of the US S&P500’s respective Growth & Value Indexes illustrates 2 clear and important facts:

1 – Growth stocks have significantly outperformed value post the GFC as most stocks in this index relish the low growth / falling interest rate environment.

2  - Both indices have broken out to fresh all-time highs producing an underlying bullish backdrop unless the 2018 highs are broken.

Both indices clearly enjoy a low interest rate environment but the growth stocks to a greater degree, when, not if, the market decides bond yields have bottomed we expect the Value Index to regain a large degree of its underperformance.

US S&P500 Value & Growth Indices Chart

Its easy to comprehend Warren Buffets attitude towards stocks when we simply consider how cheap long-term money has actual become – imagine being able to borrow $US’s for 30 years for under 2%, many would call it a simple arbitrage when you can buy a number of quality Australian equities with the monies which currently yield between 4 & 6% fully franked, imagine the compounded impact of this differential over the duration of the very same 30-years.

While the global economy walks the path of enjoying ultra-low historic interest rates, without of course falling into a recession, equities do indeed feel cheap but as investors we of course must remain vigilante to increasing signs of the ”R” word and of course inflation which would send bond yields higher.

In recent times the market has thrown up some short- term vagaries as we’ve seen bond yields readjust lower in dramatic fashion in 2019 i.e. over the last year US 30-year bond yields have fallen over 45% in actual terms, putting things in perspective many investors panic when stocks correct just 10% and a 20% pullback is labelled a Bear Market. The last years decline in bond yields has thrown up 2 clear points of interest:

1 – While bond yields have trended lower the defensive, yield play and growth sectors have outperformed.

2 – However when bond yields bounced from their late August lows the resources and banks took the lead.

Most importantly is what we think comes next and how MM wants to be  positioned for it taking into account our old favourite “risk v reward”:

1 – MM’s preferred scenario is bond yields are headed down towards, and probably below their 2019 lows. This decline could be sparked by a lack of resolution to US - China trade talks, further deterioration of global economic conditions & / or a total blow up in Hong Kong.

2 – If this fall unfolds it would represent a further  ~20% drop in yields and in all probability we would see ongoing strength /  outperformance from the likes of IT, Healthcare, Real Estate and Utilities sectors.

3 – Thirdly if we do then see a major point of inflection from a fresh low the banks / resources should then return to favour with a bang but the million dollar question is when and from what level.

When we look at MM’s 4  portfolios today it will be with major focus towards the above 3 points.

US 30-year Bond Yield Chart

As we alluded to earlier stocks are enjoying the perfect backdrop for a bull market – unprecedentedly low interest rates but no major concerning signs of imminent recession.  We only have to look at the chart below to understand Warren Buffett’s feelings towards stocks i.e. term deposits are falling under 1.5% while CBA yields almost 5.5% fully franked. The markets now factoring in a greater than 60% chance of another rate cut by the RBA in February plus MM feels we will see some meaningful fiscal stimulus in Australia and globally in 2020, what’s not to like for stocks particularly in a US election year when stocks rally over 85% of the time!

MM believes pullbacks should be bought in stocks unless we see distinct signs of rising  inflation, or a recession.

CBA Yield, RBA Cash Rate & AUS 3 Year Bond Yield Chart

As would be expected when we see poor economic data both locally and overseas not only do bond yields fall but likewise base metals lose their lustre.

With a very similar picture to bond yields, base metals now look very capable of making fresh lows in 2019, a move that MM currently intends to fade i.e. increase our exposure to resources into weakness.

Bloomberg Base Metals Spot Index Chart

No change with US stocks, unlike the better known US indices the small cap Russell 2000 remains in the middle of its late 2018 /  early 2019 trading range, similar to the ASX200 just on a much larger scale. Our “Gut Feel” at MM remains this index, which is usually a good indicator of investor optimism as it includes the more speculative US stocks, should like its big brothers make a fresh all-time high in the months ahead i.e. a further 10% more upside.

From a technical perspective a false breakout above 1750 would generate an excellent sell signal but until then no such warnings are being flagged although people keep asking / looking for them i.e. don’t fight the trend just yet, the bull market remains intact for stocks.

US Russell 2000 Index Chart

Conversely the civil unrest in Hong Kong has led to a sharp decline in both its and to a lesser extent China’s index, not surprisingly this has led to some knock on weakness in the Emerging Markets Indices – MM feels Hong Kong & China is the most likely “Black Swan” in today’s market.

MM would be very keen technical buyers of the Hang Seng ~24,000.

Hang Seng Index Chart

1 –  The MM Platinum Portfolio

Last week we switched our BlueScope Steel position into Sims Metals (SGM) a move we flagged in this report last Sunday, we also took an excellent profit on our Fortescue Metals (FMG) position. Our cash level now sits at 13.0% - https://www.marketmatters.com.au/new-portfolio-csv/

When I look at our portfolio mix while taking into account our view on bond yields and the market we are not ideally positioned short-term:

1 – On the index level we have 13% in cash plus 5% in a leveraged bearish ETF position (BBOZ), depending on your approach to the maths we have well over 20% in cash, arguably too high considering we are net bullish stocks into Christmas.

2 – We only have 6% in clearly defensive gold stocks that should theoretically benefit from falling bond yields.

3 – However we have ~20% of the portfolio exposed to the Resources / Materials sector plus 23% in the banks.

Fortunately last week 3 of our holdings performed very strongly - Pendal Group (PDL), Sims Metals (SGM) and lastly Emeco (EHL) which impressively soared over +15%. This helped alleviate the weakness in our resources positions, while the banks struggled on the surface both National Australia Bank (NAB) and Westpac (WBC) traded ex-dividend.

The logical solution in my opinion is to increase market exposure via stocks which are likely to further embrace falling bond yields, 3 potential candidates are Goodman Group (GMG), Transurban (TCL) and that volatile beast Afterpay Touch (APT) - note these are intended as relatively short-term plays. Importantly for the first 2 in particular we can run very conservative 3% stops of around ~3%, extremely important in tricky environment – remember just last week we thought TCL was going lower!

Afterpay Touch (APT) Chart

Goodman Group (GMG) Chart

2 MM Income Portfolio

Last week we took an excellent ~40% profit in CSR Ltd (CSR), our cash position has subsequently risen to 4.5% : https://www.marketmatters.com.au/new-income-portfolio-csv/

Again no real macro change, MM believes bond yields may be close to a decent low but the Official RBA interest rate is unlikely to increase anytime soon hence it remains easy to say “why hold cash in today’s market when yield / income is your objective” .

Similar to our views / thoughts covered earlier our preference is for bond yields to make new lows which should be bullish for stocks like  Transurban (TCL) which we hold in the  income portfolio.

RBA Cash Rate Chart

3 –  International Equites Portfolio

Sorry no change again! Or cash position remains at 48% : https://www.marketmatters.com.au/new-international-portfolio/

While at this stage we feel still that there are 3 ingredients missing from our International Portfolio, if bond yields are poised to make fresh all-time lows there’s no hurry to press any buy buttons. Firstly, is some extra resources exposure, BHP is good but we like fancy more, secondly more banks and lastly exposure to the Emerging Markets.

1 - Copper stocks struggled last week as bond yields and the underlying industrial metal fell but when we feel interest rates are close to a bottom we particularly Australian company OZ Minerals (OZL), a stock which already resides in our Platinum Portfolio. MM is bullish OZ Minerals (OZL) into weakness.

OZ Minerals (OZL) Chart

2 - We already own Bank of America (BAC) which is looking after us nicely but there’s no harm with increasing exposure to a good thing. MM is bullish Citigroup (C US) but there’s no hurry if bond yields are set to to fall further.

Citigroup (C US) Chart

MM has been talking about wanting to increase our  exposure to the Emerging markets for a few weeks, we believe e-commerce giant Alibaba (BABA) has now put its hand up as the ideal candidate but again there is no hurry if Hong Kong is on the edge of implosion.

MM is bullish Alibaba (BABA US).

Alibaba (BABA) Chart

Conclusion

MM is bullish OZ Minerals (OZL), Citigroup (C US) and Alibaba (BABA US) as discussed above.

4 - MM Global Macro ETF Portfolio

Also alas no change to this portfolio, our cash position remains at 51.5% : https://www.marketmatters.com.au/new-global-portfolio/

As discussed last Wednesday our favourite view moving forward is to buy the British Pound , we feel Boris Johnson will win the election and BREXIT will finally get sorted, surely common sense will finally prevail. It’s just a matter of timing, the recent pullback is feeling perfect.

The ETF will like to “play” this view is the Invesco British Pound Sterling Trust (FXB US): https://etfdb.com/etf/FXB/

NB This is a buy button we are likely to press sooner rather than later.

British Pound (GBP) V $US Chart

Conclusion

No change, MM likes the British Pound into current mild weakness.

Chart of the week.

Firstly, out of 2 today is Suncorp for all the wrong reasons! MM has been bearish since 2018 targeting a break of $11 on the downside and that view has not waivered  in over a year.

MM is bearish SUN targeting sub $11.

Suncorp (SUN) Chart

Secondly, we wanted to reiterate  that Computershare (CPU) still looks great from a the risk / reward standpoint with buying today with stops below $16 very attractive i.e. 4% risk compared to around 20% upside.

MM is bullish CPU with stops under $16.

NB This is play we will probably pass on because of the fundamental concerns but it will be interesting to watch.

Computershare (CPU) Chart

Investment of the week.

Just because we missed a better buy area doesn’t mean we should sulk and walk away like a petulant child, remember it’s a lot to do with risk / reward!

MM likes WEB with stops below $11.50 i.e. 4% risk.

Webjet (WEB) Chart

Trade of the week.

Not a stock we have “traded “ before but pharmaceutical business MYX  is looking interesting here.

MM likes MYX with stops under 51c.

Mayne Pharma (MYX) Chart

Our Holdings

Our positions as of Friday. All past activity can also be viewed on the website through this link.

Weekend Chart Pack

The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.






Have a great day!

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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